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Executive summary

Republic Act (RA) No. 12023 amends certain provisions of the Philippine Tax Code and imposes a 12% Value Added Tax (VAT) on digital services provided by both resident and nonresident digital service providers.

Detailed discussion

Under the new law, resident and nonresident digital service providers (DSP) shall be liable for 12% VAT on digital services consumed in the Philippines.

The term "digital service" shall refer to any service that is supplied over the internet or other electronic network with the use of information technology and where the supply of the service is essentially automated. Digital services shall include:

• Online search engines
• Online marketplaces or e-marketplaces
• Cloud services
• Online media and advertising
• Online platforms
• Digital goods

In particular, digital services delivered by a nonresident DSP (i.e., a DSP that has no physical presence in the Philippines) shall be considered performed or rendered in the Philippines if the digital services are consumed in the Philippines.

• If the consumers are non-VAT-registered, a nonresident DSP required to be registered for VAT shall be liable for the remittance of VAT on the digital services that are consumed in the Philippines.
• If the consumers are VAT-registered, a reverse-charge mechanism shall apply under which the VAT-registered consumer shall withhold and remit the VAT due on its purchases of digital services from a nonresident DSP.
• A VAT-registered nonresident DSP that is classified as an online marketplace or e-marketplace shall also be liable to remit the VAT on the transactions of nonresident sellers that go through its platform if it controls key aspects of the supply and: (i) sets, either directly or indirectly, any of the terms and conditions under which the supply of goods is made; or (ii) is involved in the ordering or delivery of goods, whether directly or indirectly.
• Nonresident DSPs shall not be allowed to claim creditable input tax.

A nonresident DSP must manually or electronically register for VAT and issue a digital sales or commercial invoice for every sale of digital services if: (i) "VATable" gross sales for the past 12 months have exceeded the current effective VAT threshold (currently 3,000,000 Philippine pesos (PHP3m) or approximately US$55,000); or (ii) there are reasonable grounds to believe that the VATable gross sales for the next 12 months will exceed the same threshold. The Bureau of Internal Revenue shall establish a simplified automated registration system for nonresident DSPs.

If a covered company fails to register, the Commissioner of Internal Revenue is empowered to suspend the business operations of the taxpayer in the Philippines by blocking the digital services in coordination with the Department of Information and Technology through the National Telecommunication Commission.

RA No. 12023 was signed into law on 2 October 2024 and shall take effect 15 days after its publication in the Official Gazette or in a newspaper of general circulation. The implementing regulations are expected to be issued within 90 days from the effectivity of the law, and nonresident DSPs shall immediately be subject to VAT after 120 days from the effectivity of the said implementing rules.

Recommended action plan

The regulations will impact both business-to-business (B2B) and business-to-consumer (B2C) transactions, with B2B transactions expected to be covered by the reverse-charge mechanism.

As non-registration comes with heavy penalties (particularly, suspension of business operations in the Philippines), affected companies should prepare by identifying covered transactions, assessing whether registration thresholds will be breached, and revisiting the potential impact on pricing for local customers.